FedEx Accused of Racketeering in Untaxed Cigarettes Suit

Dec. 30 (Bloomberg) -- FedEx Corp. was accused by New York
City of taking part in a racketeering conspiracy by shipping
tons of untaxed cigarettes from a Long Island Indian reservation
to city residents’ homes.

The city, in a complaint filed today in federal court in
Manhattan, alleged FedEx transported about 19.5 tons of untaxed
cigarettes from the Shinnecock Smoke Shop in Southampton, New
York, from December 2005 to January 2012. The bulk of the
shipments followed a February 2006 agreement with New York’s
attorney general to stop the deliveries, the city claimed.

“FedEx intended to, and did in fact, actively facilitate
the contraband cigarette trafficking of Shinnecock Smoke Shop,”
the city said.

New York City imposes a $15 excise tax on each carton of
cigarettes, which generally pass through wholesalers who affix
tax stamps, according to the complaint. By law, the tax must be
incorporated into the price of the product, the city said. New
York state also taxes cigarettes.

The city is seeking triple damages of $2.5 million under
civil provisions of the Racketeer Influenced and Corrupt
Organizations Act in the lawsuit, which was filed against FedEx
units FedEx Ground Package System Inc. and Federal Express Corp.

It’s also asking for a ruling that bars FedEx from making
further deliveries of untaxed cigarettes in New York, a civil
penalty of $49.5 million, and the appointment of an independent
monitor to oversee FedEx’s compliance with the court order.

Cargo Airline

FedEx is the operator of the world’s largest cargo airline,
and competes for package deliveries with United Parcel Service
Inc. It “prohibits the shipment of tobacco direct to consumers
and believes the claims made by the city are overstated and not
founded in law,” according to a statement forwarded by Angela
Wheland, a spokeswoman.

FedEx said that without a specific reason it won’t open
packages to determine their content in order to protect customer
privacy. It said it has ceased doing business with “shippers
identified as violating this provision and notified the state of
New York.”

“FedEx intends to defend this case while continuing to
work with authorities to stop prohibited tobacco shipments,”
the company said.

New York Indian tribes, including the Shinnecock Indian
Nation, have claimed that their smoke shops aren’t subject to
state and local cigarette taxes. The owner of the Shinnecock
Smoke Shop, Jonathan Smith, is a member of the Shinnecock Nation
and has been involved in legal disputes with state officials and
others over his alleged sale of cigarettes without tax stamps.

Past Suits

A call placed today to a phone number for the smoke shop
wasn’t answered. A Manhattan lawyer who has represented Smith in
past lawsuits over his cigarette sales, Scott Moore, didn’t
immediately respond to a request for comment.Smith and his shop
weren’t named as defendants in today’s suit.

The city says cigarette trafficking undercuts its efforts
to reduce the incidence of smoking and related health
complications.

“Higher cigarette prices have been incontrovertibly
established to convince greater numbers of smokers to quit,
reducing the incidence of smoking-related death and disease,”
lawyers for the city wrote in the complaint.

In addition to its dealings with Shinnecock Smoke Shop,
FedEx provided delivery services for “numerous other cigarette
traffickers” during and after negotiations of its 2006 deal
with the state attorney general, the city alleged.

Web Business

From at least 2006 through 2009, FedEx Ground serviced a
Kentucky-based cigarette enterprise called
“CigarettesDirect2U.com,” which was shut down by federal
authorities, the city alleged.

FedEx Ground agreed to pay $2.4 million to the city in
March to resolve claims of improperly delivering untaxed
cigarettes for the Kentucky seller, according to a press
statement from that period announcing the settlement.

Earlier this year, FedEx said that it was also the target
of a U.S. criminal probe into drug shipments by illegal online
pharmacies. UPS reached a non-prosecution agreement in the case
in March, including forfeiture of $40 million in payments that
it received from such outlets.

The case is New York v. FedEx Ground Package System Inc.,
13-cv-9173, U.S. District Court, Southern District of New York
(Manhattan).